(De)unionization, trade, unemployment, and wage differentials

This research examines the interaction of (de)unionization and trade liberalization in shaping firm productivity, market structure, trade flows, unemployment, and functional distribution (changes in the wage difference and labor income share). It introduces unemployment to the Melitz‐Ottaviano model by considering unionism in the differentiated manufacturing sector and searching frictions in the homogeneous service sector. It shows that unionization has a selection‐softening effect, leading to a non‐monotonic relationship between unionization and the number of firms and unemployment. With international trade, a unilateral increase in the degree of unionization in one country gives rise to a selection‐softening effect for domestic‐only firms and a selection‐toughening effect for exporting firms in this country, resulting in unemployment being more likely to increase relative to autarky. If openness to trade is relatively low (high), then the average wage difference for this country compared to its trading partner country rises (declines). Trade liberalization does not necessarily reduce unemployment, and depends on the relative degree of unionization between the two trading countries. In sharp contrast to the conventional notion, de‐unionization can increase, rather than decrease, the labor income share of unionized workers, provided that openness to trade is sufficiently high.